Ukraine spends more on defense than expected: how to close the hole in the budget

War financing is quite expensive. Despite the fact that the social expenditures of the budget are currently financed by our international partners, this year Ukraine is experiencing difficulties even to cover defense needs on its own.
In four months, that is, a third of the year, Ukraine spent 43% of the annual defense budget. If such rates of expenditure and receipts remain unchanged, the treasury may be emptied already in September. There are several objective reasons that explain why the expenses at the beginning of the year were so high, however, the hole in the budget must be closed urgently. There are several measures that the government can take. One of them is an increase in taxes. We suggest finding out what will be really effective for filling the state budget in 2024.
Why did spending exceed expectations?
One of the reasons for overtime costs is the failure to justify forecasts regarding the course of hostilities. In particular, it was expected that the intensity would decrease. The budget was laid with the expectation that from the second half of 2024, the onslaught of the Russians would slow down at the front. However, recent events in the Kharkiv Region have shown that the forecast was not justified.
During January-April, direct defense expenditures from the state budget amounted to 577.2 billion hryvnias. This is 43.4% of what was planned to be spent during the year. However, this is not much more than was spent by direction during the first four months of last year. In general, the growth compared to the same period in 2023 was only 3%, or 16.6 billion hryvnias.
The increase in expenses occurred mainly due to an increase in expenses in the direction of “public order and security”. 56 billion hryvnias more than last year (+40%) were spent on this. As for direct spending on defense, the amounts allocated from the state budget remained practically unchanged compared to the figures for 2023.
Another reason for such high costs during the first four months is the delay in the supply of ammunition and weapons from the US and other international partners. The lack of weapons at the front was partially compensated from the state budget. The money was used to purchase machinery, equipment and ammunition for the armed forces.
Now the budget needs to be reviewed. However, this is a normal practice even for countries where there are no armed conflicts. War itself creates a high level of uncertainty and complicates any forecasting. Be that as it may, Ukraine needs to look for additional sources of filling the state budget.
How to balance the budget?
There are several ways to increase revenues to the budget. One of them is placing more military bonds on the market. Steps to detinize the economy will also help. Something in this direction has already been done. In particular, the tax service and law enforcement officers kidnapped a part of manufacturers of counterfeit tobacco products. together with the increase in the excise duty on cigarettes, this will give a noticeable result.
Thanks to the adoption of draft law No. 11090 on amendments to the Tax Code regarding revision of excise tax rates on tobacco products as a basis, next year the budget will receive an additional 612 million UAH. And in 2026, thanks to the excise tax on tobacco products, the state treasury should be replenished by 5 billion hryvnias. This amount will only grow every year.
The Cabinet of Ministers is considering various options for raising taxes. In particular, it is about the possibility of increasing VAT by three percentage points – from 20% to 23%. Such a step can lead to an increase in revenues by 93 billion hryvnias per year.
An increase in the military levy to 5% (+3.5 percentage points) will equal an additional 33 billion hryvnias to the budget on an annual basis. The increase in excise duty on fuel can bring an additional 20 billion euros to the budget, and the increase in the military levy for employees – up to 90 billion euros. It should be noted that on June 4, the Verkhovna Rada already supported in the first reading the draft law on the increase in excise duty on fuel.
In general, the increase of all these taxes can increase revenues to the state budget by 250 billion hryvnias per year. If you start implementing the changes already in July or August, the treasury will receive about 70 billion additional revenues.

There are measures, the introduction of which already contributes to additional income. For example, the exposure of the scheme for the export of “black grain”, the inspection of the work and the taxation of online casinos show the effect. Over-implementation of the plan by the tax service in January-April amounted to 12.6%. That is, the budget received 38.2 billion hryvnias more than planned. The customs office also exceeded revenue plans. In the first four months of the year, 8.4% or 14.4 billion hryvnias more than expected were received in this direction.
There are other ways that could partially help close the budget hole. Among the proposed options is the conversion of part of the remaining funds of local budgets into military bonds. Alternative options also include an unplanned devaluation of the hryvnia and a budget issue by the National Bank. However, the latest proposals will have a negative impact on both the economy and the country’s currency policy, so they will be resorted to as a last resort if all other measures fail.